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PERSONAL INVESTMENT INSTRUMENT (Unit Trust Investment (Three parties…
PERSONAL INVESTMENT INSTRUMENT
Definition : Risk taking financial activities perform by individual or companies with the expectation for a positive change in value of their principal amount.
Risk and Return
Return : The benefits or reward an investor received from an investment over some period of time is the income received from an investment.
Current Income: the cash or near cash received periodically due to owning an asset example dividend, profit & rental income
Capital gain: sale of asset more than original price
Risk: The chance that the actual return may differ from what is expected
Sources of risk
Business risk : Come from business activities to the uncertainty of earnings and not reasonable return to investors.
Financial risk: Due to the company has high level of financing support the business and the mixtures of debt and equity used to support the asset.
Purchasing power risk: Refered tp the inflation risk which will give the negative effetc to the investors. High price level, low purchasing power.
Liquidity risk: Arises which the instrument may not be able to be converted into cash at reasonable price.
Interest rate risk : The changes of interest rate will adversely affect the value of securities.
Market Risk: The variability of returns to the changes in the market as a whole and result number of risk combined such inflation, interest rate risk & tax risk.
Primary market : A place where a company issues stocks/bonds for the first time to the public . The process involve is Initial Public offering (IPO) where private company sells (float) its stock to the public for the first time.
Secondary market: A market in which securities traded are not issued the issuer but by another investor.
Equity Investment
Trading in Stock ( the process)
Advantages of Common Stock
Higher return
Voting and preemptive rights
Easy to trade and low transactions cost
Variety choices
High liquidity
Disadvantages of Common Stock
High risk
Lower current income
Valuation problem
Type of Common Stock
Blue Chips stock
Belong to large , well established & financially strong companies
Consistent in paying dividend & earning
Growth stock
Issued by small firms&growing firms
Suitable for investor for seeking capital gain
Pay small dividend due to the reinvestment of the profits made for further growth.
Income stock: Issued by the firms & have long sustained record of regularly paying higher than average
Cyclical stock: The companies are more responsive to the changes with the economic cycle therefore when good economic situation the investors may obtain good return.
Defensive stock :
opposite with the cyclical stock where less affected with the economy changes
The price still stable during economic downturn
Speculative stock - Issued by firms with highly unstable earning records & very uncertain future earnings
Factors affecting stock prices
Economic factors: refers to the GDP, interest rate, unemployment rate, money supply,industrial production.currency value & trade balance
Industry outlook: looking at how competitive is the business, the regulatory condition, the industry life cycle, labor condition & technology developments.
Corporate earnings: The financial analysis will help investors understand the earning conditions, sales levels, dividends and others related.
International stock market condition : A nation's stock market also directly related to the performance of other bourses performance
Crowd psychology: Refers to the sentiment of the market & perception of investors
Political scenario: Political sistuation of country will give impact on business climate
Stock Investment Strategies
Buy and Hold strategy - the most conservative strategy to preserve the principal/ capital outlay for examples invest blue chips shares
High Current Income - To obtain and an increasing trend in the dividends. To them the safety of principal & stability of income is more important
Quality Long Term Growth : Investors concern with the capital gain & for those look for the shares that provide a consistent appreciation in value.
Aggressive stock management : for the very aggressive short term traders who have the time and skills to trade
Speculation & short term trading
Unit Trust Investment
Three parties involved
Unit holders- the investors of the fund
Fund managers- The personnel in the unit trust management responsible in managing the fund by making investment decisions & administer the operation of the fund
Trustee- someone hold the assets with the intention of protecting investors interest by ensuring managers follow the requirement in the deed.
Type of unit
Income funds: Invest in fixed income securities & huge dividend yielding shares
Capital growth funds: Invest primarily in shares with the view maximize capital growth over the long term
Aggressive growth funds: similar to capital growth but the portfolio comprise of aggressive, fast track shares that promises high returns
Balanced funds: 3 objectives which are income,moderate,capital appreciation &capital preservation
Index funds: Invest in basket shares that tracks a selected stock market index.
Bond funds:Invest in fixed income securities such as high rating corporate bonds & short term money market instruments.
Money market funds: Invest in short term money market
Islamic funds : Managed according to syariah principles invest in shares & fixed income securities which exclude non halal
Real estate investment trusrt (REITs) : Funds collected are used to buy, manage & sell real estate assets.
Advantages of UT
1.Small capital requirement - unit trust is known for its affordability
Professional management - the fund is managed by the experienced and skilled fund managers which they made decision through analysis & research.
Reasonable return & risk - on a long term basis can be better than other investment
Liquidity- UT can easily purchased & redeemed
Wide choices- various type available to suit own objectives
Disadvantages of UT
Strong affected by stock market performances especially UT investing in equities
Highly controlled by fund managers no participants of decision making
Costly- various fees charged such as initial service charge , trustee fee, mgt expenses, brokerage fees
Slow investment- price movement not rapid, not suitable for short term / aggressive investors.
Rights of Unit holders
Entitle to receive income distribution such as dividends,bonus,&any increase in value of units
To call for a unit holders' meeting to vote for the removal of manager /trustee
Entitle to a cooling off period normally 6 business days.
Entitle to receive interim and annual report